Orexigen (NASDAQ:OREX) reported its Q2 2016 financial results on August 4th. As was expected, the company had a loss. The loss was $25.2 million or $1.73 per share. The loss per share may seem high, but the impact of a reverse split meant that the loss was spread over fewer shares.
During Q2 of 2016 U.S. sales of Contrave were a branded anti-obesity sector record of 191,000. This was the last quarter that involved Takeda as a marketing partner. Moving forward, Orexigen itself will be responsible for marketing the drug in the U.S. On one hand this means getting 100% of the revenue. On the other, it means absorbing 100% of the cost.
The company reported sales related to its launch in South Korea, and is anticipating a Q4 launch of the anti-obesity drug in Eastern Europe. The partnership in Korea appears to be off to a good start, but until we get more flavor on the numbers absent initial launch inventories, it will be difficult to gauge the level of contribution that South Korea will have to the Orexigen bottom line. The recently announced deal with Rovi (NASDAQ:ROVI) in Spain is another positive step that may entice investors into speculating on partnerships and launches in Western Europe.
On the call the company seemed to go to great lengths to demonstrate that there is a possible path to profitability. In my opinion the company is still being aggressive in its projections for U.S. sales, but if several other countries are contributing to the sales story, it could be enough fuel to drive some form of equity appreciation, at least in the short term.
I think the most critical issue facing Orexigen is that it is totally reliant on one drug to determine its success or failure. At this time, the branded anti-obesity sector is not very sexy. The prospects are also troublesome when we consider that other newer drugs and formulations are already being tested and considered. Simply stated, most drugs have a limited window of opportunity to make their mark. When that window closes, the potential of an investment in that company become negligible. Perhaps more important than hitting low guidance numbers is finding something that represents the next phase of Orexigen.
Orexigen has about $260 million in cash, but at a burn rate of $20 million to $25 million, the supply of cash is not unlimited. There is not a cash crunch with Orexigen, but there is a product crunch. We are already seeing sales levels have the seasonal decline. Combine that decline with a smaller sales force and you can see where this is going. In many ways, Orexigen is becoming a fast follower of some of the strategies of competitor Vivus (NASDAQ:VVUS). The good thing in that is that Vivus has demonstrated an ability to "tread water". The bad thing is that treading water does not usually help the equity move. Initiating a leaner sales force and cost cutting are not far away in my opinion.
Orexigen has bought itself some time with South Korea launching in Q2, Eastern Europe in Q4, and Spain sometime after. In this market time can sometimes be even more valuable than money.
In my opinion Orexigen has a well spoken management team that grasps the things that Wall Street wants to hear. Management's ability to deliver on what it says has been severely challenged by various self inflicted events over the past year, as well as a branded anti-obesity sector that is simply not delivering growth to levels that Wall street wants to see.
At this stage, there are several "catalysts" that buy Orexigen time. I do not see this company being a success on a weight loss drug alone. The company should use the time it has bought itself to explore a different drug acquisition that it can develop. Even with South Korea, Eastern Europe, and Spain being added to the equation, Orexigen is not likely to see sales levels that will be compelling. In my opinion investors that want to play the news events and have quick trigger fingers can profit nicely. Long term investors may never see the reward they are seeking.
Orexigen has traded down substantially after its reverse split. There are fewer shares in the float now, so volatility could make this company a popular quick trade stock. Investors should be aware of the risks they are buying into. Sales of Contrave in the US are way below what is needed, and sales in other countries are more likely to be in the same situation. Play this stock, but play it for the swings, not because it has an obesity pill. Stay Tuned!
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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